About China Stock Market

The Shanghai stock Exchange is a not for profit industry that is governed and regulated by the China Securities Regulatory Commission. This stock market offers stocks, bonds, and mutual funds that are open to the local Chinese investors and foreign investors alike.

The shares are categorized into classes to differentiate which shares are meant for local investors and those that are meant for international investors.

There are A-shares that are quoted in the local currency, Yuan; these shares are open to being traded by the locals only and if international investors want in they have to be taken through a qualification program called QFII.

There are B-Shares that are quoted in dollars, and these are open for trading by international investors.

The Shanghai Stock Exchange list of stocks is dominated by companies that were previously state run; these companies include commercial banks, manufacturing industries, and insurance firms, most of these companies have been publicly traded since 2001 which is pretty recent.

The Hong Kong Stock Exchange, which is also the largest exchange in China, offers H-Share class stocks that are open for trading by both the local investors and international investors.

The China stock market has many differences because of how the local investors trade it and the many measures put in place by the government to control it.

Characteristics of the China Stock Market

The China stock market is unique in the sense that it is not traded in a conventional manner, and an international investor may find it difficult to make money trading it.

The following are some characteristics that highlight some the most dominant features of this market:

A massive retail trading volume: In other markets, the most dominant force is the institutional side because they have the capital to pull the market in whichever direction they will profit from. In China it is quite the opposite, the local investors have taken up their investing into their own hands, and they are actively managing their savings and growing their retirement accounts by participating in the stock market. The retail investors cover for 80% of the volume traded every day, and the 20% is covered by the institutional investors. This can only mean one thing; their market is majorly driven by the retail sentiment. If the masses are bullish on a stock, then the possibility of having that stock rally is quite massive, because any sense of greed creeping in is translated as an opportunity and the rest follow. The possibility of stock to get to an overvalued level or undervalued level in a day can be started by something as little as a misquotation of its valuation. This kind of market is considered very risky to trade, but if you are able to catch trends, you can make very good amounts of money on your investment.

The government intervenes from time to time: The Chinese government has been known to intervene in the China stock market when things become volatile. They can either intervene by pumping money into the market to boost the stock, or they can simply halt trading like what happened recently due to the massive short selling of stocks caused by the panic selling by traders. These types of intervention give an impression that the government is manipulative, and the markets may not be as free as one would consider. The government intervention and the massive retail trading volumes complement each other perfectly because with any volatility injected into the market by the retail investors the government can curb it by intervening accordingly.

The China stock market has one of the shortest if not the shortest trading sessions in the world. The market opens at 9:30-11:30 and the market closes for lunch and then re-opens from 1:00-3:00 in the afternoon. This is a total of four hours for the whole session, with this squeezed time sessions the traders will obviously have the urge to act erratically in order profit from the market when it is open. This is one of the major factors why there is increased volatility in the China stock market and to add to this the huge number of retail traders involved in the markets.

Reasons Why the China Stock Market Is Volatile

The China stock market has very many things that have an impact on its volatility and thus the erratic price movements.

The following are reasons why the China stock market moves as it does:

There exchanges apply something called limit-ups and limit-downs. These are measures that decide where the market is going to open at and when it is going to open. This is what happens when you have a limit up scenario. The exchange decides that a particular stock is going to open upwards at a particular level from the current level, and this is after shutting all trading operations for the first hour of the session. So the next day all traders without positions will have to buy up so that they can capitalize on the move and the buyers with open positions buy as much as possible to profit the more. Something like this could make a market have a synthetic rally caused by nothing that is fundamentally based. When a particular market becomes overvalued due to such actions, then the sell off that could be crippling to the economy.

The China stock market only has a few stocks that are allowed for short selling. Almost 20% can be shorted if there is that opportunity and this makes the market a rather one sided affair. If investors can only make money if a stock moves higher, then they will instigate artificial rallies just to profit from those moves higher. This is a dangerous activity that always leaves a particular stock in a position to loose its value as soon as it has rallied.